Inflation

The disinflationary trend that defined much of 2025 has stalled in recent months, creating a more complex backdrop for monetary policy. December headline CPI printed 0.3% MoM and 2.7% YoY, in line with expectations, but the more encouraging signal came from core CPI, which decelerated to 0.2% MoM and 2.6% YoY, below the 0.3% and 2.7% consensus. This marked the lowest core reading since early 2024 and was driven primarily by moderating shelter costs, which have been the most persistent source of upward pressure on the index. Owner's equivalent rent rose just 0.25% MoM, the softest pace in over two years, suggesting the long-awaited passthrough from lower market rents is finally materializing.

However, services inflation ex-shelter remains sticky at approximately 3.5% YoY, anchored by healthcare, insurance, and transportation services. Goods deflation continues to provide an offset, with used vehicle prices declining 1.2% MoM in December and durable goods broadly in contraction. The NY Fed's January Survey of Consumer Expectations showed one-year inflation expectations falling to 3.1%, a six-month low, while three- and five-year expectations held steady at 3.0%. This easing in expectations is constructive and reduces the risk of a wage-price spiral, though the absolute level remains above the Fed's comfort zone.

December PPI came in hot at 0.5% MoM and 3.0% YoY, above the 0.2% and 2.7% consensus, driven by energy and trade services margins. The divergence between cooling consumer-facing prices and firmer producer prices bears monitoring, as it could compress corporate margins or feed through to consumer inflation with a lag. The January CPI release, now scheduled for Friday due to the partial government shutdown delays, will be critical in determining whether the core deceleration trend has legs or was a one-month anomaly.

Risk and Positioning

Risk sentiment is cautiously constructive but fragile, with equities sitting near all-time highs while a constellation of cross-currents complicates the outlook. The S&P 500 closed Monday within 0.5% of its January 27th record, supported by AI-infrastructure momentum and a broadening rally that has lifted the Dow to fresh all-time highs and the equal-weight S&P 500 to record territory. The VIX settled at 17.36, down 2.25% on the session but still elevated relative to the sub-14 readings that prevailed through much of late 2025, reflecting residual uncertainty from last week's software selloff and precious metals liquidation.

Credit markets remain well-behaved, with investment grade spreads stable and high yield spreads holding near 300bps over Treasuries. However, the equity-credit divergence bears watching: equities are pricing in a soft landing with accelerating earnings, while credit spreads suggest only modest economic risk. The more concerning signal comes from international capital flows. Reports that Chinese regulators urged domestic financial institutions to curb their holdings of US Treasuries introduce a structural risk to the long end of the yield curve. China's Treasury holdings have declined to $682.6 billion, the lowest since 2008, from a peak of $1.32 trillion. While the immediate market impact was contained, this trend raises term premium concerns.

Gold surged over 2% to approximately $5,070 per ounce, its highest in over a week, as softer real yields and dollar weakness drove safe-haven demand. Silver jumped 6% to $83, extending its rebound from the historic late-January liquidation that took prices from a record $121 to the low $70s. The precious metals recovery, combined with dollar weakness and falling inflation expectations, suggests markets are repositioning for a more accommodative policy trajectory despite the Fed's cautious rhetoric.

Sector and Cross-Asset Analysis

Monday's session revealed a clear bifurcation in the technology complex that has become the defining theme of early 2026. AI-infrastructure and semiconductor names led the market higher, with Nvidia, Broadcom, and AMD each rising approximately 3%, while Palantir soared 4.5% and Oracle surged 8% on the back of continued optimism around data services and AI deployment. In stark contrast, software companies bore the brunt of ongoing concerns about AI-driven disruption, with Intuit and Salesforce each declining over 2%. This rotation within technology reflects a fundamental repricing of which segments benefit from AI versus those threatened by it.

The broader market showed encouraging signs of participation. The Dow Jones Industrial Average touched a fresh all-time high at 50,135.87, the Russell 2000 gained 0.7% to 2,689.05, and Japan's Nikkei 225 surged 3.9% to a record following PM Takaichi's landslide election victory. Mining stocks outperformed on the precious metals rebound, with gold and silver rallying sharply. International equities continue to outpace the US, with the MSCI EAFE up approximately 5% and MSCI EM up around 9% year-to-date, a significant shift from the US exceptionalism theme that dominated 2024-2025.

The dollar's 0.78% decline is both a cause and consequence of this rotation. A weaker greenback supports emerging market and commodity-linked equities while reflecting reduced foreign demand for dollar assets. Energy sector dynamics are mixed, with WTI crude stable near $64 but sector valuations having shifted from a 10% discount to a 3% premium over the past month according to Morningstar. Defensive sectors continue to lag, with Utilities and Consumer Staples underperforming as the market maintains its risk-on posture. Financials are consolidating after recent outperformance, though earnings reports this week from AIG, S&P Global, and Robinhood could provide a catalyst.

Economic Data & Events

Today's Calendar

• 4:00AM MT - Small Business Optimism Index - Moderate Impact
• Consensus: 99.9 | Previous: 99.5
• 6:30AM MT - December Retail Sales (Advance) - High Impact
• Consensus: +0.5% MoM | Previous: +0.6% MoM
• All Day - Major Earnings - High Impact